Warning says economy not out of the woods yet

What the numbers say: GDP slowed to 4.3%y/y in 3Q11 from 5.3% in 2Q. Seasonally adjusted, the economy grew 0.1%q/qsa compared to 2Q’s 0.4%q/qsa contraction. Yes, Hong Kong narrowly escaped a technical recession (defined as two consecutive quarters of sequential contraction), but the economy is clearly not out of the woods yet.

What they mean: GDP is the broadest measure of economic activity. It is strongly correlated with the profit cycle and provides important clues about inflation and the direction of policy. However, GDP has less relevance for cyclical policymaking because monetary policy is set by the US Fed according to the logic of Hong Kong’s fixed exchange rate. A strong commitment to the fixed exchange rate also limits fiscal policy in practice.

12-month outlook: Hong Kong’s growth outlook is increasingly clouded by the global financial market turmoil and the continued deterioration in external demand. This had led us to revise down our GDP projection in 2011 and 2012 to well below consensus (and below trend) at 4.5%y/y and 3.3%y/y.